The US Securities and Exchange Commission’s Division of Corporation Finance has issued new cross-border exemptions guidance that replaces and updates its 2001 Telephone Interpretations through a set of 27 Compliance and Disclosure Interpretations, 16 of which are newly published.
The US Securities and Exchange Commission’s (the Commission) Division of Corporation Finance recently published 27 Compliance and Disclosure Interpretations (C&DIs) setting forth its interpretations of the cross-border exemptions from certain registration requirements under the Securities Act of 1933 (Securities Act) and the Securities Exchange Act of 1934 (Exchange Act). The C&DIs are another step in the Division’s efforts to transition away from its legacy “Telephone Interpretations” guidance. As such, the new C&DIs replace the interpretations published in Section II of the July 2001 Interim Supplement to Publicly Available Telephone Interpretations (Telephone Interpretations). Per the Division Staff, five of the 27 new C&DIs reflect substantive changes to the previously published Telephone Interpretations, two C&DIs consist of technical revisions to the Telephone Interpretations, four C&DIs reflect only non-substantive changes, and the remaining 16 C&DIs consist of newly published interpretations.
Below we analyze the five C&DIs that reflect substantive changes to the Telephone Interpretations and the 16 C&DIs reflecting new Staff interpretations.
Section 101. Calculation of Share Ownership
Question 101.03 (Replaced Telephone Interpretations Section II.E, Question 9)
The revised C&DI adds that, in a transaction involving multiple steps (such as a tender offer followed by a cleanup merger), an offeror has the option to recalculate the US ownership for the subsequent step transaction so it can rely on an exemption for the subsequent step transaction that was not available for the first step. The Staff specifies that the offeror must recalculate US ownership as of the time periods specified in the applicable exemption and should state in the offering materials for the first step transaction that it may recalculate US ownership for the subsequent step transaction. However, the Staff highlights that recalculation would not be appropriate for what is in effect a continuation of the first step transaction. The C&DI would appear to apply in “two tier” tender offers, where securities are offered in the cleanup transaction but not in the tender offer.
Section 103. Equal Treatment
Question 103.01 (Replaced Telephone Interpretations Section II.B, Question 1)
The revised C&DI clarifies that offers conducted under the Tier II exemption must satisfy the requirement in Exchange Act Rule 14e-1(a) to hold the tender offer open for at least 20 business days from the date such tender offer is first published or sent to US security holders, even if the foreign offer commenced before being extended to US holders.
Section 104. Filing, Publication, and Dissemination of Offer Materials
Question 104.02 (Replaced Telephone Interpretations Section II.C, Question 2)
The C&DI explains that offerors relying on Securities Act Rule 802 that have officers and directors resident in the United States may tailor the legend required under Rule 802(h) as appropriate so that it is not confusing or misleading. The revised C&DI no longer covers rights offerings under Securities Act Rule 801, thereby limiting the Staff’s guidance to exchange offers and business combinations involving a class of securities of a foreign private issuer under Rule 802. The omission of Rule 801 from the revised C&DI suggests a legend would be required for a rights offering under Rule 801 with similar facts, even though the legend in Rule 801(b) also contains the “to the extent applicable” language cited by the Staff in the revised C&DI. The revised C&DI does not explain the basis for limiting its application to Rule 802.
Question 104.03 (Replaced Telephone Interpretations, Section II.D, Question 1)
The revised C&DI clarifies that the publication of a less detailed summary advertisement in a US publication with national circulation that specifies the means through which US holders can obtain a complete English translation copy of the offering materials published in the bidder’s home jurisdiction would be a “manner reasonably calculated” to inform US holders of the offer, as required by Securities Act Rule 802(a)(3)(iii). The interpretation also expands the examples of permissible means by which investors can request the documents to include an email address and website, not just a toll-free number.
Question 104.05 (Replaced Telephone Interpretations Section II.G, Question 1)
The C&DI was revised to inform that a foreign private issuer that is exempt from Exchange Act Section 12 pursuant to Exchange Act Rule 12g3-2(b) and is conducting a third-party tender offer that excludes US security holders may post the tender offer materials on its website or send the materials through an electronic information delivery system without becoming subject to the US tender offer rules. To avoid the applicability of the US tender offer rules, the materials must not include a transmittal letter or other means of tendering the securities and must prominently disclose that the offer is not available to US persons or is being made only in countries other than the United States. Also, the issuer must take precautionary measures that are reasonably designed to ensure that the offer is not targeted to US persons.
Meanwhile, the revised C&DI did not change the Staff’s position that a foreign private issuer conducting a third-party tender offer that excludes US security holders may voluntarily furnish the tender offer materials under cover of Form 6-K without becoming subject to the US tender offer rules, so long as the bidder takes steps to ensure that the information is not used as a means to induce indirect participation by US security holders.
Section 100. General
The new C&DI explains that the cross-border exemptions are premised on the presence of an applicable foreign regulatory regime in the home jurisdiction that provides a regulatory framework for the offer, rather than on the applicability of specific rules in the home jurisdiction. As such, the home jurisdiction’s rules need not be directly comparable to US tender offer rules, even if such differences result in the same transaction being regulated differently in each jurisdiction, as in the example of a warrant flush transaction described in the C&DI.
The Staff clarifies in the new C&DI that the term “successor registrant” in Securities Act Rule 802(a)(1) does not mean an Exchange Act reporting company, but rather the surviving entity generally, regardless of whether the surviving entity is an Exchange Act reporting company. Moreover, the term is unrelated to the concept of being a successor registrant for purposes of Exchange Act Rule 12g-3.
Section 101. Calculation of US Ownership
The new C&DI states that a bidder should count as part of a foreign entity’s US ownership base any securities where the bidder knows or has reason to know that a US holder exercises investment and dispositive power over such securities, within the meaning of Exchange Act Rule 13d-3. We draw attention to the knowledge qualifier in the Staff’s language, which is consistent with Securities Act Rule 800(h). Presumably, the requirement for reasonable inquiry in paragraph (4) and the reference to reports disclosing beneficial ownership in paragraph (5) of that rule will likewise apply.
The new C&DI emphasizes that Securities Act Rule 800(h)(4) requires an actual good-faith inquiry, including of nominees, regarding whether securities are held for the account of customers resident in the United States, even when responses are not likely to be forthcoming or may be incomplete. Only after such “reasonable inquiry” may the alternate test, based in part on trading volume, be used to calculate US ownership.
The Staff emphasizes in the new C&DI its existing view that the calculation of US ownership should be conducted on or before the date of commencement of a tender offer or rights offering. In the C&DI’s example, the commencement of the transaction occurs less than 30 days after public announcement of the transaction.
The new C&DI explains that securities of an acquiror held by its security holders would not be excluded in the calculation of US ownership for determining cross-border exemption eligibility where a business combination involving two companies (one of which is the accounting acquiror) would result in a new holding company and that holding company would issue shares to holders of both companies. The Staff cites to Release No. 33-8957 (Sept. 19, 2008), where the Commission explained that, “[i]n assessing what securities should be considered for the calculation [of US beneficial ownership], it is appropriate to exclude those held by the acquiror because it will not be participating in the acquisition as a target holder.” As the Staff points out, holders of the acquiror securities in the C&DI’s hypothetical would be receiving shares of the new holding company as a result of the combination.
The C&DI offers guidance on how to determine “pro forma” US ownership for the new holding company where the parties do not know the exchange ratio in a combination at the time of announcement. The Staff explains it will not object if the parties use their comparative market capitalizations, meaning the respective US ownership levels of each party and their respective market capitalization figures would determine the “pro forma” US ownership of the holding company after completion of the transaction. Further, the Staff conveys that market capitalization figures should be determined as of the date range provided in Securities Act Rule 800(h)(1) (generally as of a date no more than 60 days before or 30 days after public announcement of the transaction). Lastly, the Staff informs that it will not object to parties using a good-faith estimate of the exchange ratio when they have such an estimate within the permissible date range under the rule.
The C&DI explains that a party seeking relief from the Staff in a potential cross-border tender offer should make the requisite inquiries of nominee and record holders in order to provide the Staff with information about the US ownership of the subject securities, so the Staff can consider the level of US regulatory interest in the cross-border transaction in its determination of whether to grant relief. This applies even though the bidder in the C&DI’s hypothetical is not seeking to rely on the Tier I or Tier II cross-border exemptions.
Section 102. Determination of the Subject Class
The Staff explains that the term “sought in the offer,” as used in Exchange Act Rules 13e-4(h)(8)(i) and 13e-4(i)(1)(ii), refers to the class of securities that may be tendered into the issuer tender offer. In the C&DI’s fact pattern, the Staff explains that the subject class of securities does not include securities of that class that underlie convertible debentures. We note the contrast with determination of beneficial owner under Rule 13d-3(d)(1)(i), which states that a person is deemed to be the beneficial owner of a security if that person has the right to acquire beneficial ownership of such security within 60 days, including but not limited to any right to acquire through the conversion of a security, and permits the amount outstanding used for the percentage calculation to include the shares that person can acquire upon conversion. This interpretation could result in the availability of the exemption even if the percentage of shares tendered by US holders significantly exceeds the thresholds in the exemption, if a significant amount of convertible securities is held in the United States.
The Staff offers guidance on determining whether different classes of securities should be viewed as separate classes for the US ownership test. Relevant factors include whether the shares are priced differently in the business combination, whether one class is publicly traded and the other is not, and whether the two classes of securities vote separately on matters presented to shareholders. In the C&DI’s hypothetical, the Staff stresses that the fact that two classes of securities have the same voting rights with regard to the transaction in question is not dispositive. If deemed separate classes, the exemption would have to be satisfied separately for each class.
The C&DI clarifies that a foreign private issuer may rely on Securities Act Rule 801 to extend a rights offering to its US holders without registering the offering in the United States where the US holders hold equity securities through Global Depositary Receipts (GDRs) instead of American Depositary Receipts (ADRs). The Staff explains that GDRs serve the same purpose as ADRs in evidencing ownership of the underlying equity securities. The Staff cites to Release No. 33-7759 (Oct. 22, 1999), where the Commission explained that “Rule 801 is limited to the offer of securities of the same class of securities as those held by the offerees, because the offerees already have made the decision to invest in that class.”
Section 103. Equal Treatment
The C&DI explains that where a foreign offer being made as part of a dual offer in reliance on Exchange Act Rule 14d-1(d)(2)(ii) permits the tendering shareholders to choose between receiving US dollars and the currency of the company’s home jurisdiction, holders tendering into the US offer must be afforded the same option to choose between the two currencies for purposes of satisfying the equal treatment requirement in Rule 14d-1(d)(2).
The C&DI indicates that where a cross-border tender offer is not subject to Regulation 14D, the bidder may offer cash to US holders and shares to all other holders of the subject company, assuming such a structure is permissible under the laws of the company’s home jurisdiction.
The Staff explains that a bidder in a cross-border tender offer for a class of equity securities registered under Section 12 can rely on Exchange Act Rule 14d-1(c)(2)(iii) to offer cash to US holders while offering a choice between cash and stock consideration to non-US holders when relying on the Tier I exemption.
The Rule’s “substantially equivalent” requirement is satisfied where the cash consideration offered under the election feature to holders in the company’s home jurisdiction is equal to or greater than the value of the stock consideration offered under that feature and the bidder offers the same amount of cash to US holders. Accordingly, if the bidder places a premium to the stock consideration in the cash consideration offered under the election feature, then US holders must be offered at least the same amount of cash as the non-US holders. However, if the value of the cash consideration offered under the election feature is less than the value of the stock consideration offered to non-US holders, then US holders should be offered the amount of cash that is at least equal to the value of the stock consideration. Otherwise, the “substantially equivalent” requirement would not be satisfied because non-US holders would have the option to receive stock with greater value than the amount of cash offered to US holders.
Lastly, the Staff states that the value of the consideration should be determined at the commencement of the offer and not reevaluated. However, if the bidder increases the value of the stock consideration of the offer, the amount of the cash offered to US holders would need to be increased as well to satisfy the “substantially equivalent” requirement of the rule.
Section 104. Filing, Publication, and Dissemination of Offer Materials
The Staff clarifies that when documents that have been filed electronically with the home jurisdiction’s regulator or posted on the issuer’s website are required to be incorporated by reference into a registration statement under the rules of the home jurisdiction, those documents are considered published or disseminated to shareholders, and thus Part I, Item 1(a) of Form CB requires an English translation to be delivered to US holders. This is necessary to ensure that US holders have the same access to information as their foreign counterparts.
Section 105. Withdrawal Rights
The Staff relies on the Commission’s guidance in Release No. 33-8957 (Sept. 19, 2008) to emphasize that a bidder cannot rely on the Commission’s position allowing for termination of withdrawal rights immediately after waiving or reducing a minimum tender condition during the time that the tender offer must remain open.
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 As published, the C&DI refers erroneously to Release No. 33-7769 instead of 33-7759.